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EQONOMIC ORDER QUANTITY (EOQ)

EQONOMIC ORDER QUANTITY (EOQ). COST OF INVENTORY. 1. PURCHASE COST. 2. CAPITAL COST. 3. ORDERING COST. 4. INVENTORY CARRING COST. 5. SHORTAGE COST. INVENTORY CONTROL TERMINOLOGY. 1. Demand : Number of items required per unit time.

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EQONOMIC ORDER QUANTITY (EOQ)

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  1. EQONOMIC ORDER QUANTITY (EOQ)

  2. COST OF INVENTORY • 1. PURCHASE COST. • 2. CAPITAL COST. • 3. ORDERING COST. • 4. INVENTORY CARRING COST. • 5. SHORTAGE COST.

  3. INVENTORY CONTROL TERMINOLOGY • 1. Demand : Number of items required per unit time. • 2. Order Cycle : The time period b/w two successive order. • 3. Lead Time : The time gap b/w placing a order & received the item. • 4. Safety stock : This is the buffer stock for overcome uncertainties. • 5. Re-order level : When the stock level reaches re-order level new order issued. • 6. Re-order quantity : This is the quantity of material to be ordered in ROL.

  4. DETERMINATION OF EOQ • Let, D = Annual demand. • C0 = Order cost. • Ch = Inventory carrying cost. • Cp = Price per unit. • Q = Quantity order. • Q* = Economic order quantity. • N = Number of order placed per year. • Tc = Total cost per annum.

  5. CONTINUED………….. • Annual ordering cost = No. of orders * ordering cost / order. = Annual demand / order quantity * ordering cost / order. = D / Q * C0 …………..(i) Annual inventory carrying cost = Avg. Inventory investment * inventory carrying cost. = (Max Inventory – Min Inventory ) / 2 * Inventory carrying cost . = Q / 2 * Ch..................(ii) Annual Total Cost = Annual ordering cost + Annual Inventory cost. = DCo / Q + QCh/2 ………….(iii) To determine EOQ differentiate Annual Total Cost eq (iii) we got, dTC / dQ = -d DCo / Q² So, Q² = 2DCo / Ch Q* = √ 2DCo / Ch ( Q* = economic order quantity). If inventory carrying cost is expressed as a % of annual avg. inventory investment then, Q* = √ 2DCo / Cp.I

  6. SOME RELATED FORMULAS • 1. Optimal number of order placed (N*) = D / Q* • 2. Optimal time diff b/w two order (T*) = no. of working days / N* 3. Minimum total yearly inventory cost (Tcm) = √ 2 D . Co. Ch

  7. SAMPLE PROBLEM • A co. has got a demand for particular part at 10,000 units per year. The cost per unit is Rs. 2 & it costs Rs. 36 to place an order and to process the delivery. The inventory carrying cost is estimated at 9% of average inventory investment. Determine • (i) Economic order quantity. • (ii) Optimum no. of orders placed per annum. • (iii) Minimum total cost of inventory per annum. Sol : (i) EOQ ( Q*)= √ 2DCo / Cp.I = √ 2 . 10,000 . 36 / 2 . 0.09 = 2000 units. (ii) Optimum no. of order = D / Q* = 10,000 / 2000 = 5 (iii) Total annual inventory cost = Ordering cost + Inventory carrying cost = 2 * Ordering cost ( at EOQ Ordering cost=carrying cost) = 2 . D / Q* . Co = 2 . 5 . 36 = 360 .

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